When You're The Oilman

A barrel of oil in the ground is a bit like a share of common stock. If the price goes up, you stand to gain when you cash in. For a lot of ranches that own mineral rights, the time to cash in on oil and gas reserves may have arrived. With a barrel of oil pushing into the mid $60s in September, drilling companies are finding it profitable to exploit reserves that wouldn't have been worthwhile when

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A barrel of oil in the ground is a bit like a share of common stock. If the price goes up, you stand to gain when you cash in. For a lot of ranches that own mineral rights, the time to cash in on oil and gas reserves may have arrived.

With a barrel of oil pushing into the mid $60s in September, drilling companies are finding it profitable to exploit reserves that wouldn't have been worthwhile when crude was in the $20-$30/barrel range.

So, companies may show up at your place and want to lease portions of your ranch where you hold the mineral rights. This could add extra cash flow to your ranch, but a word of caution is in order: cashing in requires careful negotiations to ensure you get a square deal. You also need to ensure the exploration crews don't tear up the ranch while hunting for oil.

“When oil companies come in, they have a tendency to make your life different,” he says. “You'll have roads where there were none before, and you'll have lots of people running around, which can be disruptive to your ranching operation.”

Remember, Hendry says, that when you begin selling the rights-of-way for oil company roads and pipelines, you're actually selling a portion of the ranch, and things will never be the same.

“Having a company that will sit down and talk to you at the kitchen table is important,” he points out. “Developing a good relationship is one of the best things you can do. It eliminates misunderstandings and helps solve problems that occur.”

But, in talking to the company, he says ranchers should make sure they deal with someone in a position of authority within the company.

“You can't, in many cases, just deal with the first person who shows up,” he says.

While Hendry's ranch has dealt with oil companies for decades, some newcomers to the process may find it bewildering. He advises them to first see an attorney with a strong background in oil-related law. Next, consult ranchers and other third parties who have dealt with oil companies to get the benefit of their experience.

“I don't advise dealing with the oil companies without any outside input,” Hendry says. “You want to make sure everything is going right.”

Other protective steps

Hendry has taken a number of steps to protect the ranch and make sure things go smoothly. For instance, Clear Creek gives oil companies special-use permits for roads that service oil facilities rather than granting easements.

“With a special-use permit, the rancher still owns the land on which the road lies. If you give the oil companies an easement for roads, they then own the land,” Hendry says.

Clear Creek also formed a construction company to handle oil-related construction on the ranch. This captures revenues from the oil companies that otherwise would have gone to a third party. And, since Clear Creek is doing the work itself, it can make sure the work is done in a way that minimizes impacts on the ranch.

“Our take on things it that the energy is there and America needs the energy,” Hendry says. “We're not going to stand in the way of developing it but, at the same time, we want some control over how it's developed.”

Doug McInnis is a Casper, WY-based writer on business management topics.

Evaluate oil-related expenses

The rising price of energy means it's a good time to evaluate every part of the ranch that depends on fuel for cost savings. Sometimes, there isn't much that can be done. For instance, rising oil prices will hike the cost of transporting cattle, but it's got to be done.

But it may be possible to cut the number of business or personal trips from ranch to town by careful advanced planning. This is especially important in isolated areas.

Some operations that are feasible when oil is at $50/barrel might be prohibitively expensive at a higher price. Such operations should be regularly re-evaluated to see if they still make economic sense, not only in light of increasing energy prices but cattle-price trends, as well.

For instance, Carol Hamilton, co-operator of a cow-calf and yearling operation in southwest Wyoming, says they traditionally ship their calves to California for winter grazing.

“The cost of shipping has been inching up but we pencil it out every year. So far, it still pays for itself,” Hamilton says. “But the higher transport price has cut into profits we otherwise would have made. If cattle prices should fall, shipping them to grass in California will become unfeasible.”

High fuel may be here to stay

Some folks believe the run-up in oil price will be followed by a big drop — something that's happened in the past. That may not happen this time, however. In fact the long-term outlook suggests climbing oil prices will continue, at least until the world develops a serious alternative to oil.

Three factors are driving up prices. The most obvious is the short-term shocks that impact the oil supply. The disruption caused by Hurricane Katrina is the most recent example. Such shocks are temporary; when they pass and the oil begins to flow again, prices tend to moderate.

The other two factors, however, won't go away.

One is the industrialization of the developing world, principally China and India. As they industrialize, their citizens can afford cars. Since these two countries have a combined population of roughly two billion people, they will sop up an increasing amount of the world's oil. Thus, the old law of supply and demand will kick into high gear.

The second factor is the unlikelihood of major new oil fields being discovered. A recent story in Technology Review, a Massachusetts Institute of Technology (MIT) research magazine, reports that 94% of all available oil has been found. The article also says existing oil fields have reached their maximum production capacity.

In the future, we can expect oil production to begin falling. And, by 2019, some experts predict oil production will only be 90% of today's level.

Meanwhile, China and India, and perhaps many more developing countries, will have joined the ranks of gas-guzzling nations. In other words, we may be looking at less oil and more demand — a prescription for very high prices and very long gas lines.

As a result, we're not likely to bail ourselves out of the oil crunch by producing more oil. That doesn't mean we're out of luck, however. There is one way out. If you can't improve the supply, you can cut demand by developing vehicles and industrial processes that use less oil, or no oil at all.

Hybrid cars and trucks now rolling off assembly lines are one sign of things to come. Hydrogen-powered vehicles also may be in our future. Another possibility is gasoline made from coal, a procedure that's long been available but previously economically unfeasible.

Some oil experts say the writing has been on the wall for decades. In 1969, respected geologist M. King Hubbert projected world oil production would peak around 2000, then begin to drop. At first, production would fall slowly, he said, then accelerate. This may be what we're seeing now.

Hubbert had earlier predicted U.S. domestic oil output would hit its high point in the early 1970s. That prediction was on the money. Now, we're waiting to see if he's right on his second forecast. If he is, we're in for some bumps.